Friends and family always tend to watch the gyrations of the Australian dollar. For them, it’s an indicator of spending power for an overseas holiday. But the reality is, the exchange rate represents many things; a comparison of growth prospects, relative inflation and interest rate differentials, speculation, and of course the usual supply and demand associated with global trade of imports and exports just to name a few.

With that in mind, if you looked at a recent chart of the Australian Dollar (vs USD), you could be forgiven for thinking the Aussie is strengthening; bouncing from 75c to around 80c US. The move suggests our economy is set to grow at a faster rate than the US, our interest rate trajectory is set to be higher, as would inflation. But this is not what’s happening, the US is having a stellar run on growth and interest rates.

But if you compare the recent moves of the Australian dollar compared to the Euro, we are weakening; this suggests they will have higher inflation, growth and interest rates.

What is missing from both parts of this story, is that it is not about Australia. It is all about the US. President Trump has enacted $1.5b of tax cuts which has created a chunky hole in government coffers. His argument is that it will increase the growth of the US economy, and therefore lift the amount of revenue the Government collects.

But what if growth stumbles?

The US Governement’s debt pile is around $20b, and this number will only grow with less money coming in to pay it down. This debt to gdp metric we look at (which Greece famously recorded at 180%) will therefore rise from around 75% to 120% over the next few years. For comparison, Australia is about 20%. 

Back to currency markets… they are basically voting that they prefer to have their money anywhere else than the US. That is, they prefer the relative safety of the Eurozone and Australia, rather than the US.